On the inevitability of austerity

22 July 2015

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All across the euro area the reaction to the financial crisis has been rather uniform: austerity, a regime of structural reforms to achieve internal devaluation. To a large extent, the very design of the Economic and Monetary Union (EMU) frames such course of action. In the absence of monetary instruments to adjust to economic fluctuations, local economies can only rely on policies on the fiscal front. Coupled with the strict criteria imposed by the EMU’s legal framework, cuts to public spending and investment, as well as tax hikes, become the sole legal route out of a recession. Such situation, treated at face value, provides justice to the argument that austerity is indeed inevitable—there is no alternative, at least not inside the Euro.

From an analytical point of view, a distinction needs to be made concerning the legal-institutional order imposing certain restrictions and the constellation of political forces willing to implement them. The Euro is an ill-designed currency, lacking the adequate fiscal capacity and democratic structures that would render it something other than an austerity monolith. Yet products of political will and interaction have no autonomous force outside the scope of entities seeking to internalise them. The qualitative and normative aspects of the single currency are contingent on a certain approach to politics, a given ideology. They are the outcome of specific political processes and circumstances, not some preordained reality.

When referring to “reality”, one needs to bear in mind a bifurcation that is being posited in various forms at least since the time of Plato: what we perceive as real, as truly being, can either be so because of our mind or regardless of it. The reality of apples being pulled to the ground is mind-independent; it happens even if all humans were to agree that the Earth’s gravity does not and should not exist. In contradistinction, the reality of the binding power of statutes is mind-dependent, for there is nothing other than human tradition or convention that renders them such.

If this sort of metaphysics holds, then we have to treat the EMU and its policies as mind-dependent, which implies their potential to be something other than what they are, if agreed so. There is nothing in “the nature of” the single currency that renders it a legal-economic driver for wage repression. It is what it is due to the given political establishment. Concerning austerity (and perceived inevitability thereof), we need to consider whether it also is contingent on the balance of power in society or whether secular economic forces bring it to the fore. I would contend that there is a mixture of both.

Economic conditions

A micro-economic entity must operate within its means. Choices are bound by the available resources. One cannot consistently make decisions that exceed the limits of what is economically viable. Something has to give.

The case is not as straightforward when it comes to states. Though it can be intuitive to think of them as households on a grander scale, such approach fails to account for some important modal differences between a micro-economic agent and a sovereign state operating at the macro-economic level. These can be summarised as follows:

sovereignty: a state has, among others, the capacity to raise taxes, and to exploit the natural resources within its area of control, so that given the circumstances, it can expand its revenues, while also determine what qualifies as a potential source of revenue;

persistence: in a manner of speaking, states do not run out of business, for even if they do default on their debts they will persist qua states, continuing to exercise their authority as such over extended periods of time;

authority: the boundaries of possibility within a state are to a large extent defined by what the state itself considers permissible, while new conditions can be created or shaped by means of its own initiative (such as the introduction of a novel type of legal tender);

prescience: a state, by virtue of its power to access vital information, and also in light of its capacity to initiate economic-institutional processes, such as research and development in areas where no private actor invests in (e.g. space exploration decades ago), enjoys a certain advantage in knowing in advance what microeconomic agents will often realise ex post facto;

primacy: no other entity can have such immediate, direct, and broad an impact on economic activity as the state, since it has the capacity to initiate investments, intervene at every stage of the value chain, formulate the parameters of production, delineate the boundaries of freedom within which markets emerge, and so on.

Though a state is clearly not a household—and it is too simplistic to think of it as such—it still faces constraints, not least because it exists in a world that features a multitude of states. Furthermore, even if no inter-state variable is present in a given set of constraints, economic conditions may have been shaped in such ways that, within a rigid time frame, the state has limited options at its disposal. Such economic factors can be encapsulated in the following:

credibility: the state’s capacity to borrow money is dependent, among others, on its risk profile as a debtor, implying that a dismal track record or an expected inability to meet future payments will increase the cost of borrowing, often to exorbitant levels;

inefficiency: an inefficient state or, conversely, an indebted state regulating an under-performing economy, can face limitations that stem from the misalignment between desired and effective output, i.e. where it wants or needs more than what is available from production;

interdependence: the financial system may suffer from a series of market failures that render it prone to shocks, meaning that the state will have to intervene, make corrections and provide support, often at the expense of its own budgetary sustainability;

interoperability: the institutional milieu in which the state operates, as well as the range of factors contributing to—and/or framing—its economic prospects, can interoperate in such ways that the system as such becomes the cause of a major crisis.

I would argue that the eurocrisis, in its various emanations, features all of the above and, hence, there exists an alignment of forces that bring forth the need for structural reform. Still, there is nothing in the specifics of things that forces policy to attain a particular character; no exterior force whatsoever that compels a government to implement measures that place relatively greater burdens on the lower parts of the income distribution, exacerbating social inequality.

Governments have thus far opted to pursue such policies mainly due to ideological reasons, although there are certain practical considerations that make it “easier” for them to loot the poor[-er] (such as e.g. a small business not having the means to siphon its profits to some tax haven).

What is considered in this section, is the combination of mind-dependent and mind-independent factors contributing to the need for structural reform. Based on these one may argue for the inevitability of “austerity”, although that entails the erroneous presumption that the ideological underpinnings of the policy response to the crisis are themselves exogenous, which brings us to the following section.

Political conditions

Another way of describing political reality, is to think of it as the nominal context in which all intersubjective and interobjective human relations take place. By that, we argue for a mind-dependent state of affairs.

The inevitability of austerity in the euro area is due to the willingness of the status quo to think of it as inevitable. If, for instance, the balance of power was different, decisions could have been made to pool resources towards the creation of an ad hoc Treasury tasked with issuing euro-area-wide bonds. A conference on public debt could have happened, resulting in mutual debt write-offs. Some major investment strategy—a “Marshall Plan”—could have been put in place. The European Central Bank could have initiated a policy of Quantitative Easing much earlier. The Emergency Liquidity Assistance mechanism would never be used to blackmail governments, and so on.

The reason none of these possible outcomes ever became actual, is traced back to the existing constellation of forces. For better or worse, most of the policy-makers congregating the various inter-governmental fora of the EU/EMU to formulate the political response to the crisis, have a specific mindset that guides their thinking and conduct. Considered in outline, that is characterised by the following:

inter-governmentalism: no EMU-wide solutions should be delivered, as they would pave the way for a genuine federal republic—the opposite of what most governments actually want, vague rhetoric to the contrary notwithstanding;

neoliberalism: the traditional distinctions between centre-right and centre-left have been rendered meaningless, at least as concerns economic policy, since both essentially agree on a narrow conception of “competitiveness”, which amounts to little more than the explicit and implicit aspects of the cost of labour (and the consequent repression of wages);

de-politicisation: this is the presumption that has fostered the EMU’s existing technocratic order, the idea being that by “de-politicising” the various instruments and objectives of public policy, they can engender a culture of trust and stability, at the high cost of diminishing the reach of democratic control, while creating a system of shared responsibility without shared sovereignty.

Based on these, we may indeed acknowledge the fact that austerity is inevitable, though such “inevitability” is, paradoxically, a very conscious choice made by the powers that be.

No need for fatalism

The Euro itself is designed in such a way that it enforces a specific kind of economic policy, yet its legal-institutional order does not prevent policy-makers from pursuing alternate paths. As the wise saying goes “where there’s a will, there’s a way”. The narrative in support of austerity’s inevitability is indicative of the European leadership’s unwillingness to think and act in a non-conformist fashion.

That granted, there is no need to be fatalistic. Austerity can be reversed, the Euro can be reformed in a meaningful way to achieve the two-fold objective of democraticising its structures and making it socially sustainable. This does not—and will not—happen serendipitously and effortlessly. There needs to be concerted effort from the forces that labour to address—indeed to undo—the status quo’s triptych of inter-governmentalism, neoliberalism, and technocracy.

Whatever the case, austerity is not here to stay, at least not by necessity. As for the claim that “this is how things are”, though empirically informed, it gives rise to far-fetched conjectures, sometimes generating pure fabulation. That is not helpful and it better be avoided.